The DOL’s Employee Benefits Security Administration (EBSA) released a report assessing the quality of audit work performed by certified public accountants with respect to financial statement audits of retirement and welfare plans subject to ERISA. Benefit plans subject to ERISA must conduct annual financial audits as part of their annual Form 5500 filings unless they qualify for an exemption. The EBSA report is based on a sample of 400 plan audit reports filed in the 2011 filing year (according to the report, more than 81,000 audit reports were filed by more than 7,300 licensed CPAs for the 2011 filing year).
The EBSA study found that 39 percent of the audits reviewed contained major deficiencies with respect to one or more relevant Generally Accepted Auditing Standards (GAAS) requirements, putting $653 billion dollars in plan assets and 22.5 million plan participants and beneficiaries at risk, according to the report. The report stated that these numbers reflect an increase in the amount of plan assets and participants at risk compared with prior EBSA studies. The remaining 61 percent of audits, according to the study, complied with auditing standards or contained only minor deficiencies.
The study also found a correlation between the number of plan audits performed by the CPA and the quality of the audit work performed. CPA firms who performed only one or two plan audits during the 2011 filing year had a 76 percent deficiency rate, while CPA firms who performed the most plan audits had a deficiency rate of only 12 percent, according to the EBSA study. In addition, the EBSA study found that CPAs who were members of the American Institute of CPAs’ (AICPA) Employee Benefit Plans Audit Quality Center tended to have lower deficiency rates.
As a result of the study’s findings, the EBSA report made 11 recommendations related to enforcement, legislation, regulations, and outreach. Notably, the report recommended targeting CPA firms with smaller auditing practices that audit plans with large amounts of plan assets, and coordinating with AICPA and state accounting boards to improve investigation and sanctioning of CPAs whose work is significantly deficient. In addition, the report recommended amending ERISA to make sure civil penalties associated with annual reporting focus on the responsible party. Specifically, the report proposed authorizing the Secretary of Labor to assess a penalty of up to $1,100 per day against an accountant who performed an ERISA plan audit that was rejected due to a deficient audit. Other notable recommendations made in the report include amending the definition of “qualified public accountant” to include additional requirements and qualifications related to ensuring the quality of plan audits, amending ERISA to repeal the limited-scope audit exemption (applicable to plans with assets held in regulated entities such as financial institutions), and amending ERISA to authorize the Secretary of Labor to establish additional accounting principles and audit standards related to audit quality.
Plan administrators and plan sponsors should be aware of the EBSA report and its recommendations because it may result in plan auditors significantly increasing the rigor of their annual audit procedures.